Diamonds - A very rough trade
Roman Grynberg | Friday December 13, 2013 17:05
In 2012, total world diamond production of mined diamonds stood at some 128 million carats of diamonds at a value of US14.5 billion. But total imports of diamonds as recorded by all countries in the Kimberly Process, which exists to regulate 'conflict diamonds', was three times this figure at 393 million carats valued at some $50 billion. So without cutting a diamond, their value had risen from $98 to about $125/carat.
The first time a rough diamond crosses a border it is from the country of production in Africa, Canada or Russia to where it is aggregated, which was until very recently in London at De Beers office at Charterhouse. Under the 2011 marketing agreement between Botswana and De Beers, aggregation of diamonds is now returning to its geological home in Africa, in other words, Botswana, so diamonds produced by De Beers in Canada, Namibia and South Africa will go to Botswana rather than to Charterhouse in London, the former capital of diamond aggregation.
The second time a rough diamond crosses a border, it is often traded for 'cleaning purposes' i.e. either to clear it of any possibility that the owner will ever pay a penny in income taxes in another jurisdiction, to gain other commercial benefits or just simply to launder money from other businesses and increasingly to fund criminal activities. The beauty of diamonds lies not just in their appearance but their high value to weight. This has always made them easy to smuggle and because of their natural scarcity as well as the De Beers cartel, they were in the 20th century a good hedge against inflation and economic and political crises. But increasingly organisations like the OECD are taking a keen interest in diamonds and their use for money laundering and funding of terrorism. A major publication by the OECD on diamonds and money laundering is expected in the coming months.
The third time a rough diamond crosses a border it is to be cut and that normally is in India, which despite the pretensions of the Southern African countries like Botswana, South Africa and Namibia is basically where 80-90% of the world's diamonds were cut in 2012. India regularly boasts that 14 out of every 15 diamonds set as jewellery in the world were processed in India. For India, diamonds are amongst its biggest export sectors responsible for exports worth US$ 43 billion (14% of total exports) in the financial year 2011-12. Diamond production is one of the leading growth sectors of India's economy with an estimated 1 million jobs.
Dubai and Switzerland - laundries of choice?
The equivalent of about half of the world's production of rough diamonds passed through the Dubai Diamond Exchange in 2012. In the 21st century it is rapidly replacing Antwerp and Tel Aviv as the trading centre of choice. In 2012, Dubai imported some 60 million carats of rough and exported, virtually the same volume. So what were the diamonds doing in Dubai? - The short answer is they were increasing in value. The average price of the rough entering Dubai in 2012 was $78/carat and when the same volume of rough left it was worth $112, an increase of almost 45%, which is what you would expect from trade with a country that offers businesses a 50 year tax holiday.
Make your profits in the tax haven, and there are no issues with those very few countries that are still taxing 'diamantaire' on what they say their income and profits are. Because diamond traders are notoriously economical with the truth when it comes to the real price of diamonds most diamond jurisdictions like Belgium and Israel have long ago dispensed with the nicety of even asking 'diamantaire' what their incomes are and have moved to presumptive taxes based largely on turnover.
But evading income tax in the diamond industry where there are potentially thousands of different grades of diamond which can make the appearance of low or zero profits almost pro forma certainly predates the ease and simplicity of evasion that tax havens like Dubai and Switzerland created. One of the most important commercial benefits of these havens lies in the secrecy they permit when it comes to the corrupt trade in diamonds. Let us say you are a corrupt official of a diamond exporting country. Assume that you have a shipment of USD 100 million of diamonds that you value at $50 million. This allows the trader to avoid the payment of export taxes or royalties and to split the benefits with the corrupt official. This is amongst the more profitable of rough diamond transactions but you need a place where secrecy is respected and where you can realise the full $100 million value of the transaction by trading with a related company.
Dubai's imports of rough in 2012 came from several very conflict-prone producing countries in Africa, including Congo (DRC), Zimbabwe and Angola. Not one of these countries has had a happy history with diamonds and Zimbabwe and Congo have had their share of problems with the Kimberly Process itself. If the Kimberly statistics are to be believed, then three quarters of Zimbabwe's 12 million carats of diamond exports in 2012 went straight to Dubai. The importance of Zimbabwe to Dubai is such that the permanent secretary of Mines and Mineral Development in Zimbabwe is, as a regular matter, appointed to the board of the Dubai Diamond Exchange. Almost one half of Angola's production was exported to Dubai and one quarter of DRC total production of 21 million carats went there as well. But this is by no means where the bulk of Dubai's trade is coming from.
Of course it would be easy to blame the three weakest African producers but the real magnitude of Dubai's trade with Africa is small stuff when compared to the two biggest users of tax free trading environment - the EU and India. India imported roughly a quarter of its rough diamonds through Dubai and the rest from Europe. For Dubai exports to India in 2012 were approximately half of its total exports of rough. Thus it remains an entrepot for African rough going into India for processing. The other main trading partner with Dubai was the EU, which has been one of the main destinations for exports. It is by no means simply Africans and Indians using Dubai as a laundry service of choice.
Dubai also has a thriving polished diamond market where its tax free environment has led to massive growth and the country becoming one of the truly great diamond centres of the world. But there is another reason for this burgeoning trade in rough and polished diamonds. Until early this year, India allowed the import of polished diamonds duty free while simultaneously providing financing subsidies to stimulate the exports of the country's largest export. The ever industrious Indian diamantaire, developed a new technique of ripping off their national diamond trading system called 'round tripping'. The Indian government has long provided export credits at subsidised rates for the diamond sector and these subsidies were very lucrative but dependent on the export of cut diamonds. So the Indian traders would ship the same consignment of cut and polished diamonds five or six times across the Indian ocean to Dubai claiming export credits each time. But this illicit trade went full circle because the Indian authorities also required the Indian cutters to show that they had processed the rough and so they would have to 'round trip' rough diamonds as well as cut and polished and so volumes in this very rough trade also increased massively until the Indian government finally imposed a 2 percent import duty earlier this year on imported cut diamonds. With gold prices tumbling, import duties on gold in India rising, the Indian government is set to increase the import duty on cut diamonds again to 5 percent in the coming weeks. As there remain several commercial reasons for round tripping, not just skimming for export credits, this may decrease the trade significantly across the Indian Ocean. Dubai is by no means the only country that plays the role of entreport for the free wheeling trade in rough diamonds but it is now by far the biggest. Its importance is a reflection of the shift in international trade patterns that increasingly excludes Europe and brings Africa and Asia closer together. For many years, Switzerland has performed a similar function. Now Dubai as well as several provinces in China are starting to swamp the traditional tax havens and gaining an important place in the global diamond market. And in the meantime, the world's diamantaire will continue to claim that they make no profits from diamonds and schools and hospitals will not be built in Africa.
These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.